Dollar weighing up tax and trade influences

The dollar is a little stronger as we open this week as the Senate and House’s tax bills have finally been combined and will likely be voted upon as early as tomorrow. While the mathematics of the Senate voting appear a little unclear at the moment, the impact on the US economy and equities is little in doubt, especially with the confirmation that the cuts in taxes for US businesses will be imposed in 2018 as opposed to 2019.

While all this is a positive for the dollar and for global risk, other noises from the White House are more provocative. According to the FT this morning, President Trump will accuse China of engaging in “economic aggression” when he unveils his national security strategy on Monday. As we outlined in our webinar last week on ‘What to Expect in 2018’ we see an increase in ant agnostic trade rhetoric or conditions between the US and China as our greatest risk to world markets.

All the good will provided by the largest change in the US tax code since 1986 could easily be outdone by a seizure in global trade. .

GBP: Christmas joy on Brexit and sterling

It could be the fact that this time next week will be Christmas Day but sterling has opened the week positively. It is more likely to be a continuation of the feeling that some of the darkest clouds around Brexit, channelling fears of delays and cliff edges, may be starting to dissipate. Prime Minister May will address the Commons today to officially update Parliament on the progress of Brexit talks to Stage 2.

The key now for sterling is what happens around a transitional deal. Any agreement of a transitional deal that allows the UK to remain a member of the single market and the customs union will be seen as a net positive for the pound and could drive GBPUSD as high as $1.40.

Theresa May will have a difficult job convincing the more extreme members of her party that a transitional deal is in keeping with a Hard Brexit. For now however, any deal that eliminates a cliff-edge on March 29th 2019 will see investors look on the pound more favourably.

Our expectations for sterling and Brexit in 2018 will be sent out as our Sterling Update this afternoon. Any questions or comments are, as always, gratefully received.

The Day Ahead

Needless to say, this is going to be a quiet week with typical seasonality demand likely to drive investors into the USD into and over the multiple bank holidays that make up the Christmas period. That dollar demand will equalise in the first week of January but we would not be surprised – alongside the possible vote on taxes – if the USD is a little stronger as we break for the holidays.

Jeremy is one of the UK’s leading voices on foreign exchange, and you’ll regularly find him on television and across the national media giving his unique, thoughtful insight. He has made regular appearances on BBC News, BBC Radio 5 Live and Newsnight, as well as in leading blogs and newspapers.
Having started out at HSBC in the City of London, Jeremy decided on a move into currency after a brief stint in private equity advice. He joined World First in 2007 as a Corporate Dealer when the Corporate Desk at World First consisted of only five people. He took on the role as World First's Chief Economist in 2010.